ANALYST WATCH: Bearing the bad news

3 min read

COMMENTARY--Give Goldman Sachs some credit this week for its somewhat proactive effort to brace investors for Oracle's profit warning and, most likely, many more in the weeks to follow.

Typically, this column devotes a lot of space to the mistakes and the Monday-morning quarterbacking of sell-side analysts who always seem to find lots of reasons to frown on technology companies after they deliver the bad news.

On Tuesday, Goldman Sachs analyst Rick Sherlund lowered his earnings and sales estimates on Oracle (Nasdaq: ORCL) and a bunch of other software companies ahead of its profit warning.

It seems that Goldman Sachs might have realized Oracle was going to miss estimates in its third quarter at about the same time that Oracle executives did.

At its recent applications conference, Oracle delivered an upbeat message, which was based on a robust pipeline on the second to last Tuesday before the quarter closed Wednesday. Then, in those last few days, CEOs and CFOs suddenly pulled out of deals that had already been negotiated, Oracle Chief Executive Larry Ellison said Thursday night.

Sherlund was also the guy who cut his estimates for Microsoft (Nasdaq: MSFT) a week before it warned that it would miss estimates in its second quarter back in December.

Just as in the Microsoft case, the rest of the investment community followed Goldman's lead Friday by downgrading Oracle shares and issuing ominous research reports about its prospects in the fourth quarter which is traditionally its most lucrative period.

Morgan Stanley Dean Witter, USB Piper Jaffray, Prudential Securities, Salomon Smith Barney, Banc of America Securities, Frost Securities, First Albany, Merrill Lynch and Deutsche Banc Alex Brown all downgraded the stock Friday, predicting varying degrees of peril for Oracle as its shares plunged 18 percent to a 52-week low of $17.50.

Sherlund also downgraded the stock, cutting it from the company's vaunted "recommended list" to a "market outperform" rating. It also served as great opportunity to reinforce his estimate reductions for other software firms.

"Visibility is low and we probably cannot rely on other software vendors to close their pipelines at the end of their quarters as they may expect. This applies more to those vendors that are more dependent on end-of-quarter deals, particularly larger deals," Sherlund said.

That Oracle is going to miss third-quarter expectations is only a small surprise and one that certainly wasn't out of the realm of possibility if you take a look at its stock chart for the past three months.

Sherlund admitted as much Tuesday when he said besides the companies themselves, sell-side analysts are usually the last to recognize what the market has already discerned.

"Oracle was one of the last generals left standing on a brittle technology battlefield, and in the end couldn't avoid the bullets and hand grenades that were showering down from above," wrote Morgan Stanley analyst Charles Phillips in a research note. "It has become clear that in an environment like this one, there are no bulletproof vests."

It's worth noting that amid all this carnage and capitulation, Merrill Lynch analyst Christopher Shilakes, who cut Oracle from a "long-term buy" rating to "long-term accumulate," provided a little perspective by advising investors not to "sell blindly at current levels."

Investors could have used that kind of perspective about a year ago when everyone rated Oracle and Microsoft as "strong buys" when they were trading at levels they'll be lucky to see again before the summer of 2002.